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US and Iran could have a friendlier future ahead

As nuclear negotiations between Iran and a group of world powers resumed Wednesday, some observers say a less acrimonious future between the United States and Iran makes economic sense.

Robotic arms weld car bodies at the automated Khodro auto plant in Tehran, Iran, Dec. 9, 2013.
Scott Peterson | Getty Images
Robotic arms weld car bodies at the automated Khodro auto plant in Tehran, Iran, Dec. 9, 2013.

The Iranian economy has been severely hampered by eight years of escalating sanctions imposed over the country's nuclear ambitions. While a deal to ease sanctions would be transformative for Iran's economy, some see an agreement paving the way for an even greater prize: a first step toward the day when Iran and the United States become partners—at least on some level.

Trade between the United States and Iran is essentially prohibited, and no one expects a friendly relationship between the countries in the near term. But Ian Bremmer, president of the Eurasia Group, said he sees a structural shift underway as the United States becomes increasingly energy independent. Within 10 years, he said, he sees Iran becoming one of the United States' closest partners in the region.

"You ask me long term who the United States is likely to work with (in the Middle East), especially as the efficacy of American sanctions starts eroding globally, it's going to be be Iran long term," Bremmer recently told CNBC's "Squawk Box."

Iran has tremendous growth potential, thanks to one of the most diverse economies in the Middle East and a large middle class, experts say. Perhaps more importantly, U.S. interests in the region are shifting, which creates opportunities at a time when Iranian President Hassan Rouhani has appeared to encourage reconciliation with the outside world.

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In terms of potential markets for U.S. goods, Iran is the Middle East's second most populous country after Egypt, boasting a demand base of 77 million people, more than twice the population of either Saudi Arabia or Iraq.

China and the United Arab Emirates combined to contribute almost half of Iran's $18.3 billion in imports in the first quarter of 2014, according to the CIA World Factbook.

Many Iranians would prefer to do business with the West if given the chance, said Djavad Salehi-Isfahani, an economist at Virginia Tech. They believe the Western supply chain is more reliable than China's and want higher-quality raw materials and finished products than they get from the China, he said.

"Iran is a fairly natural ally for the United States, because what the Iranians want in terms of economic development and peaceful coexistence is what Americans want in the area," Salehi-Isfahani said.

Even factoring in a two-year recession in Iran and the modest recovery in Europe, Iran's economy has performed better than that of the average country in the European Union in the years since the financial crisis, said Patrick Clawson, director of research at the Washington Institute for Near East Policy.

Clawson said that former British Prime Minister Tony Blair's "comment that Tehran looks a lot more like Athens than it does like Bombay is true. This is not the Congo. This is not Baghdad."

Iran is the largest car producer in the Middle East, and mineral mining and manufacturing contributed 14 percent to GDP in 2012. Iran's light manufacturers do well selling things like laundry detergent on the regional market, said Salehi-Isfahani.

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The country's engineers are increasingly in demand as neighbors seek to build roads, dams, and other infrastructure. Exports of engineering services increased 40 percent year over year to reach nearly $500 million this past spring, according to the Trade Promotion Organization of Iran.

Health care is another bright spot, said Salehi-Isfahani. Many Iranian-Americans get dental work done while visiting, and pilgrims who travel to the second largest city, Mashhad, pair a visit to the Imam Reza shrine with a trip to one of the city's hospitals for medical care, he said.

The nation also managed to shrink its non-oil trade deficit under sanctions, and Iran now stands to become a middle-income, reasonably prosperous country even without oil revenue, Clawson said. Non-oil exports more than tripled since 2005 to reach $30.7 billion last year, according to an analysis of data from the Trade Promotion Organization.

Better relations are easier said than done

"lf Americans have any role in making that happen [in Iran], that will be the most stabilizing influence in the Middle East of anything I can see the Americans doing." -Djavad Salehi-Isfahani, economist, Virginia Tech

To be sure, the United States and Iran remain divided on a number of major political issues—including Iran's support for Syria's leadership, and perhaps especially its refusal to recognize the state of Israel. Iran has also directed extremely threatening language toward Israel, a critical U.S. ally.

Aside from Israel, U.S. allies Saudi Arabia and the United Arab Emirates would become concerned by renewed relations between the United States and Iran. Saudi Arabia has remained the top U.S. ally in the region (besides Israel) because it has provided abundant oil and cooperated with American military activities in the region, Bremmer said. But that relationship may be no more of a natural fit than a relationship with Iran.

"These are strategic allies of convenience, but there's not a lot that really binds them together," Bremmer said.

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American and European financial institutions and companies would be hesitant to do business in Iran in a post-sanctions world, Clawson said.

Corruption remains a serious problem, and foreign businesses see the issue as having become even more thoroughly entrenched in recent years as Iran has had to devise ways to evade sanctions, Clawson said. The Revolutionary Guards, a politically powerful branch of the Iranian military, has a tendency to muscle into markets after merchants make them profitable, making it difficult to determine which sectors are truly private, he added.

Clawson also anticipates banks will be wary of running afoul of regulators following Commerzbank's anticipated $1 billion settlement with the U.S. Justice Department on charges that it violated Iranian sanctions and money laundering laws. Standard Chartered paid $327 million to settle similar claims two years ago.

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Ultimately, the United States has a broader incentive for rapprochement with Tehran. Iran has the potential to present a model for what world trade and globalization can bring to the Middle East, said Salehi-Isfahani. By playing the development game, Iran could influence its neighbors to do the same.

"This idea that you behave yourself, you have elections, you elect moderate leaders, you build your roads and schools, and you succeed, that's a lesson that Americans are trying to sell to the world," he said. "If Americans have any role in making that happen [in Iran], that will be the most stabilizing influence in the Middle East of anything I can see the Americans doing."